WASHINGTON — Senate Republicans, attacked for twice blocking legislation to rein in Wall Street, floated a partial alternative proposal Tuesday and said it could lead to election-year compromise on an issue that commands strong public support.
The 20-page outline would prohibit the use of taxpayer funds to bail out failing financial giants of the future and impose federal regulation on many but not all trades of complex investments known as derivatives. It also calls for consumer protections that appear weaker than Democrats and the White House seek, and it would create new regulations on mortgage giants Fannie Mae and Freddie Mac.
The outline surfaced shortly before Senate Republicans united for the second straight day to block action on White House-backed legislation designed to prevent any recurrence of the ills that led to the economic calamity of 2008.
The 57-41 vote left the measure three shy of the 60 needed to advance.
Senate Majority Leader Harry Reid, D-Nev., said he would hold additional votes later in the week, and, he, President Barack Obama and other Democrats have spent days accusing Republicans of doing the bidding of the big financial firms on Wall Street.
"The American people deserve an honest debate on this bill," the president said in Ottumwa, Iowa.
Reid said, "More than two years after the financial collapse that sparked a worldwide recession, Senate Republicans are claiming we're moving too fast.
"Two-thirds of Americans support us cracking down on big bankers' reckless risk-taking. And a majority supports us asking banks to pay for their own funerals — that's the fund financed by the big financial firms to cover the cost of their liquidation."
The events unfolded in the Capitol as Republicans and Democrats alike spent hours at a committee hearing criticizing current and former officials at Goldman Sachs for seeking profits from the collapse of the housing market two years ago.
But the Senate Republican leader, Mitch McConnell of Kentucky, said Democrats were going too far, coming up with a bill that "reaches into every nook and cranny of American business." Moments before the vote, his second-in-command, Sen. Jon Kyl of Arizona, predicted that unlike the recent health care battle, this time bipartisan legislation eventually would pass.
The current stand-off follows months of fitful bipartisan negotiations that have failed to yield agreement.
The Republican summary, obtained by The Associated Press, differs from the Democratic measure on several key points.
While banning the use of taxpayer funds in liquidating large financial firms, it calls for the cost to be borne by creditors and shareholders. Democrats favor a fee on banks to cover those expenses.
Republicans suggested a council comprising bank regulators and independent appointees to ensure that large banks and other financial institutions do not take advantage of consumers, as opposed to a Democratic proposal for an independent agency with broader powers.
Derivatives, which are complex investments that contributed to the 2008 economic collapse, would be brought under federal supervision for the first time, but not to the extent Democrats seek.
Republicans also called for restrictions on government assistance to Fannie Mae and Freddie Mac and want the president to submit a reorganization plan. Both are essentially owned by the government, which took control when they lurched toward failure during the collapse of the housing market.
Here are the highlights of the bill, according to reports by the AP and The Wall Street Journal:
1) RESOLUTION: Would create an orderly liquidation process for financial companies the government believes could have an adverse impact on the financial stability of the country if it collapsed.
a. The Federal Deposit Insurance Corp. would be mandated to break up the company within one year of being appointed receiver, though it could get two six-month extensions. Anything longer than that would take congressional approval.
b. Before a company could be put into resolution, Treasury would have to submit a request with the U.S. District Court for the District of Columbia. This court could only block the government’s move if it found Treasury’s determinations “arbitrary and capricious.”
c. The FDIC would be able to advance funds to creditors, but it would have to recoup from creditors any money a creditor received in excess of what it would have gotten in bankruptcy.
2) FED: Would create a presidentially appointed director of supervision and regulation at the Federal Reserve, who would have to be confirmed by the Senate. The Republican proposal also has strict limits on the Fed’s ability to provide emergency lending, among other things.
3) CONSUMER: Would create a Council for Consumer Financial Protection, that can “promulgate rules for all of the enumerated consumer protection statutes.” The council will have three consumer protection experts, the head of the FDIC, the Comptroller of the Currency, and the Fed Chairman.
a. The council will have supervision and enforcement power over the country’s biggest financial companies. It will also have backup enforcement power over regional banks and credit unions. State laws would be preempted by national laws.
4) FINANCIAL STABILITY: Would create a Council of Financial Regulators to monitor the financial stability of the U.S. “The CFR will formally bring together all federal financial regulators to improve regulation, maintain and monitor financial stability, and coordinate the response of the federal government to any future financial crises.”
5) DERIVATIVES: Create more regulatory transparency, and give the Fed, Securities and Exchange Commission, and Commodity Futures Trading Commission the authority to determine which swap transactions should have to be cleared.” End users who don’t contribute to potential system failure won’t be required to clear their transactions.
a. Regulators will be able to force margin requirements against “swap participants” but not “end users.”
6) UNDERWRITING: Anyone who underwrites a mortgage which doesn’t meet minimum underwriting rules would have to retain at least 5% economic interest in the trust.
7) GSEs: Creates a special inspector general within the Treasury to investigate and report to Congress on the conservatorships of Fannie Mae and Freddie Mac. The Republican plan would create federal funding limits and mandatory portfolio reductions for the companies. It will also restrict the amount of money the government can advance the firms.
8) SEC: would create five divisions within the SEC. The divisions would be 1) retail investor protection and retail financial services, 2) division of trading, 3) division of corporate disclosure, 4) division of enforcement, 5) division of economic analysis.
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